Greece and the euro - European Commission European Commission Communicating on the euro Greece and the euro Greece joined the European Union in 1981, and adopted the euro in 2001 in time to be among the first wave of countries to launch euro banknotes and coins on 1 January 2002. Last update: 4 may 2009 Greece at a glance Surface area: 131 960 km2 Population: 11 262 539 (Eurostat 2009) Joined the European Union: 1 January 1981 Currency: Euro since 1 January 2001 (formerly Greek drachma, GRD) Euro information Status: Euro-area member since 1 January 2001 Fixed conversion rate: €1 = 340.750 GRD Adoption of the euro: The euro banknotes and coins were introduced in Greece on 1 January 2002, after a transitional period of one year when the euro was the official currency but only existed as 'book money'.

The dual circulation period – when both the Greek drachma and the euro had legal tender status – ended on 28 February 2002. Exchange of former national currency: The Τράπεζα της Ελλάδος (National Central Bank of Greece) exchanged drachma coins until 1 March 2004 and will continue to exchange drachma banknotes until 1 March 2012. Documents and publications Documents from the euro changeover are available on the Bank of Greece website (also in English ) Opinion polls and surveys An economy crumbles | The Economist An economy crumbles Uncertainty about whether Greece will stay in the euro is crippling its prospects Jan 28th 2012 Tweet THE banners at the entrance to the Bank of Greece museum in Athens promise a “fascinating journey through Greece's modern economic and monetary history”. How could any passer-by resist? Inside the museum ranks of glass cases enclose an array of coins and old bank notes, as well as the paraphernalia used to make them.

The bills range from 5 drachma up to 100m drachma, a reminder that Greece has had problems with inflation in the past. The end of history, at least for this exhibition, is 2001 when Greece adopted the euro. But the country's present troubles suggest an important chapter to the story of Greek money is still to be written. Some reckon the drachma may roll off the presses again. This is no longer just a fantasy of diehard sceptics about the euro in Britain and Germany. Even Greeks concede that the big problem afflicting the economy, now in its fifth year of recession, is the uncertainty about whether Greece can stay in the euro and get its act together. Savers are anxious that their cash might be forcibly converted to a new Greek currency. By November the Greek banking system had lost a quarter of the deposits it had two years earlier. To fill the gap, the banks have borrowed €43 billion ($56 billion) of emergency funds from the Greek central bank on top of €73 billion of secured loans from the European Central Bank (ECB). Credit remains in short supply because banks have had to cut loans and raise borrowing costs. Informal credit arrangements between firms are breaking down.

Foreign suppliers now demand cash payment upfront, making liquidity even scarcer. In this section Reprints Few investors or businesses are brave enough to make long-term bets on the Greek economy in these conditions. The stockmarket has fallen steeply (see chart 1). “You can buy good companies for pocket money,” says one business chief. Assets are cheap but they would become cheaper still were Greece forced out of the euro. Capital spending is down by almost half from four years ago; house building has fallen by two-thirds. The one bright spot is tourism: visitors to Greece were up by 10% last year, in part because tourists steered clear of the unrest in north Africa. There are hopes that the economy might recover next year if Greece's place in the euro is confirmed. Agreement on a big new support package from the euro zone and the IMF would put some minds at rest. But a deal on new money cannot be thrashed out until the IMF in particular is sure that Greece's public finances are on a sustainable path. That depends, among other things, on private-sector creditors signing up to a bond-exchange deal that will see half of the face value of their Greek paper written off. A deal is proving elusive.

Bondholders think Greece's European rescuers should share in the pain. The ECB has purchased around €40 billion of Greek government bonds, at a discount to their face value, as part of its programme to stabilise bond markets. It stands to make a profit on them, which riles private bondholders. They also want a higher interest rate on the new bonds than officials are willing to sanction. Until a deal is done, Greece is stuck. From bad to worse The ever-gloomier diagnoses of Greece's economy and public finances further complicate negotiations. An IMF report published at the end of last year said that a 50% write-down on private-sector bonds, a target set at an EU summit in October, together with €130 billion of extra official financing at low interest rates would give Greece a decent chance of getting its public debts down to 120% of GDP by 2020. But that assessment already looks too sanguine. The headwinds facing the economy are proving much stronger than had been forecast. Greece's GDP probably fell by 6% last year, far more than expected. A weaker economy has made it harder for Greece to meet its fiscal targets.

Softer growth in the rest of the euro-zone economy has not helped. But the depth of last year's slump owes much to a shortage of liquidity, an influence which most economic models ignore, says Yannis Stournaras of IOBE, an Athens think-tank. The Greek central bank's figures show that bank credit to households and private firms fell by 2.4% in the year to November. Banks suffering a drain of deposits have had to husband their liquidity. Official lending figures do not reflect the drying up of other sorts of credit. An informal system by which firms used postdated cheques to pay for supplies has broken down, in part because banks are warier of taking them as collateral for short-term loans. Firms complain that the government is slow to pay value-added-tax (VAT) rebates, making the liquidity shortage worse. Few foreigners will supply Greek customers on the basis of a credit guarantee from a Greek bank. So Greek importers, however solid, usually have to pay cash upfront. Some firms are finding ways round the stigma of being a Greek enterprise and the credit troubles that brings. The headquarters of Aquis, a firm that runs hotels and resorts in Greece, was recently moved to London by its founder, Ioannis Kent.

It is now a UK holding company with a British bank account into which the firm's revenues are paid. Other firms have delayed payments to suppliers and employees. A necessary fiscal squeeze is adding to the downward spiral and risks becoming self-defeating. The sorts of public spending that are likeliest to induce other economic activity, such as roadbuilding, have been cut, says Mr Stournaras. Big tax increases are not a sure-fire way of raising revenue in a country where taxes are routinely avoided. The rate on restaurant meals was raised from 11% to 23%; such a sharp jump seems almost an invitation to cheat for cash-strapped small businesses. The IMF says a shortfall in VAT receipts suggests some firms are not complying. A hike in car taxes prompted many drivers to hand in their licence plates. With so many uncertainties, the Greek economy cannot hope to attract the investment it needs to spur recovery. Until a deal on private-sector losses is finalised and implemented, investors cannot rely on a second bail-out package that will keep Greece in the euro. Even if a deal on losses is agreed in principle, a substantial number of holdout creditors could force the Greek government to implement a coercive restructuring. That might further unsettle bond markets and depositors.

Banks will also have to be recapitalised after taking losses on their Greek bonds; no one is sure whether they will remain in private hands. Goodwill hunted Slow progress on freeing up the economy and cutting the deficit has cast doubt on the ability of Greece's leaders to implement reforms. Last year the country moved up one place (to 100th) in the World Bank's rankings of 183 countries for ease of doing business. Businessfolk call for something more radical to demonstrate the country's commitment to reform. One suggestion is immediately to shut down lossmaking or underutilised public entities. Another is to tackle the corruption and inefficiency of the tax system by outsourcing the job to foreign tax officials or to a private-sector tax consultancy. That would speed up much-needed use of centralised computer records and stop the face-to-face contact between tax collectors and taxpayers that begets bribery. A signal that banks would operate at arm's length to the state would also reassure potential investors. So would a high-profile assault on a closed industry. But Greece's economic problems are too big to be fixed quickly.

Despite a jobless rate that has risen to 18%, Greece still has a current-account deficit of 10% of GDP (see chart 2). For an economy to have so much slack and yet consume more than it produces is a sign of chronic uncompetitiveness. The IMF has said it will take more than a decade for Greece to become competitive. Some reckon it would be easier for Greece to regain its edge by going back to the drachma and devaluing than by keeping the euro and suffering grinding wage deflation. The short-term disruptions would be outweighed by long-term gains. Most businesspeople see little merit in devaluation. “The empirical evidence is against it,” says Efthymios Vidalis of SEV, Greece's main business federation. “Greece had two devaluations after joining the European Union and the benefits were short-lived before inflation eroded them. It didn't work.” There is another way. When the crisis struck, Apostolos Vakakis, the founder of Jumbo, a Greek retailer, faced a choice: cut costs by 20% or raise productivity by that amount. He chose to improve productivity.

In return for a pledge not to cut jobs or wages, Jumbo's employees agreed to work harder. Each store is now staffed with fewer workers, allowing the firm to open outlets at a faster rate. Explore our interactive guide to Europe's troubled economies Many stress the importance of greater competition in bringing business costs down. In contrast to devaluation, the benefits from opening up professions and industries to competition are permanent, says Mr Stournaras of IOBE. “It is the ‘doing business' sort of competitiveness that matters,” he says. Greek executives point to the lack of competition in trucking, where no new licences have been issued since 1971, as an example of an industry that raises costs for other Greek firms. Public opinion also still favours the euro: more than 70% of Greeks say they want to stay in the single currency. But if Greece is to have the breathing-space it needs to right its economy, it has to convince its rescuers that they are not throwing good money after bad. A deal on private-sector losses is only a first step; it seems likely that the euro zone will also have to stump up more money than expected to keep Greece going.

It will be a while before the drachma printing plates on display in Athens can truly be confined to history. In covers: The euro crisis May 19th 2012 It is not a good idea for Greece to leave the euro. But it is time to prepare for its departure Related: May 12th 2012 Amid growing risk of a Greek exit, the euro zone has yet to face up to the task of saving the single currency itself Related: November 26th 2011 Unless Germany and the ECB move quickly, the single currency’s collapse is looming Related: November 5th 2011 The markets are not the euro’s only threat. Voters may be too Related: October 29th 2011 This week’s summit was supposed to put an end to the euro crisis. It hasn’t Related: October 1st 2011 Unless politicians act more boldly, the world economy will keep heading towards a black hole Related: September 17th 2011 It requires urgent action on a huge scale.

Unless Germany rises to the challenge, disaster looms Related: July 16th 2011 By engulfing Italy, the euro crisis has entered a perilous new phase—with the single currency itself now at risk Related: June 25th 2011 The opportunity for Europe’s leaders to avoid disaster is shrinking fast Related: March 12th 2011 This may be remembered as the week Europe began to split apart. One woman could stop that Related: January 15th 2011 The euro area’s bail-out strategy is not working. It is time for insolvent countries to restructure their debts Related: December 4th 2010 The euro is proving horribly costly for some. A break-up would be even worse Related: November 20th 2010 Ireland’s woes are largely of its own making but German bungling has made matters worse Related: July 10th 2010 Yes: the European Union will thrive if its leaders seize the moment in the same way they did 20 years ago Related: May 1st 2010 The Greek debt crisis is spreading.

Europe needs a bolder, broader solution—and quickly Related: Next in The world this week X Next in The world this week X Next in The world this week X Next in Middle East and Africa X Next in Middle East and Africa X Next in Middle East and Africa X Next in Middle East and Africa X Next in Middle East and Africa X Next in Middle East and Africa X Next in Middle East and Africa X Next in Finance and economics X Next in Finance and economics X Next in Finance and economics X Next in Finance and economics X Next in Finance and economics X Next in Finance and economics X Next in Science and technology X Next in Science and technology X Next in Science and technology X Next in Science and technology X Next in Books and arts X Next in Books and arts X Next in Books and arts X Next in Books and arts X Next in Books and arts X Next in Books and arts X Next in Economic and financial indicators X Next in Economic and financial indicators X Next in Economic and financial indicators X Next in Economic and financial indicators X Next in Economic and financial indicators X ExchangeRate.com - Currency Information Greek Euro Also See: The greek drachma The euro (sign: €; code: EUR) is the official currency of the Eurozone: 16 of the 

27 Member States of the European Union (EU) and is the currency used by the EU institutions.

The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.Estonia is due to join the eurozone on 1 January 2011.The currency is also used in a further five European countries, with and without formal agreements, and is consequently used daily by some 327 million Europeans.Over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa. The euro is the second largest reserve currency (a status it inherited from the German mark) as well as the second most traded currency in the world after the U.S. dollar.As of June 2010, with more than €800 billion in circulation, the euro is the currency with the highest combined value of banknotes and coins in circulation in the world, having surpassed the U.S. dollar. Based on IMF estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world.

The name euro was officially adopted on 16 December 1995.The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. Euro coins and banknotes entered circulation on 1 January 2002. Administration The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) and the Eurosystem (composed of the central banks of the eurozone countries). As an independent central bank, the ECB has sole authority to set monetary policy. The Eurosystem participates in the printing, minting and distribution of notes and coins in all Member States, and the operation of the eurozone payment systems. The 1992 Maastricht Treaty obliges most EU Member States to adopt the euro upon meeting certain monetary and budgetary requirements, although not all states have done so. The United Kingdom and Denmark negotiated exemptions,while Sweden turned down the euro in a 2003 referendum, and has circumvented the obligation to adopt the euro by not meeting the monetary and budgetary requirements.

All nations that have joined the EU since 1993 have pledged to adopt the euro in due course. CHARACTERISTICS Coins and banknotes The euro is divided into 100 cents (sometimes referred to as euro-cents, especially when distinguishing them from other currencies). In Community legislative acts the plural forms of euro and cent are spelled without the s, notwithstanding normal English usage.Otherwise, normal English plurals are recommended and used;with many local variations such as for example 'centime' in France. All circulating coins have a common side showing the denomination or value, and a map in the background. For the denominations except the 1-, 2- and 5-cent coins that map only showed the 15 Member States which were members when the euro was introduced. Beginning in 2007 or 2008 (depending on the country) the old map is being replaced by a map of Europe also showing countries outside the Union like Norway. The 1-, 2- and 5-cent coins, however, keep their old design, showing a geographical map of Europe with the 15 Member States of 2002 raised somewhat above the rest of the map.

All common sides were designed by Luc Luycx. The coins also have a national side showing an image specifically chosen by the country that issued the coin. Euro coins from any Member State may be freely used in any nation which has adopted the euro. The common (top) and national sides of the €2 coinThe coins are issued in €2, €1, 50c, 20c, 10c, 5c, 2c, and 1c denominations. In order to avoid the use of the two smallest coins, some cash transactions are rounded to the nearest five cents in the Netherlands (by voluntary agreement) and in Finland (by law).This practice is discouraged by the Commission, as is the habit of certain shops to refuse to accept high value euro notes. Commemorative coins with €2 face value have been issued with changes to the design of the national side of the coin. These include both commonly issued coins, such as the €2 commemorative coin for the fiftieth anniversary of the signing of the Treaty of Rome, and nationally issued coins, such as the coin to commemorate the 2004 Summer Olympics issued by Greece. These coins are legal tender throughout the eurozone.

Collector's coins with various other denominations have been issued as well, but these are not intended for general circulation, and they are legal tender only in the Member State that issued them. The design for the euro banknotes have common designs on both sides. The design was created by the Austrian designer Robert Kalina.Notes are issued in €500, €200, €100, €50, €20, €10, €5. Each banknote has its own colour and is dedicated to an artistic period of European architecture. The front of the note features windows or gateways while the back has bridges. While the designs are supposed to be devoid of any identifiable characteristics, the initial designs by Robert Kalina were of specific bridges, including the Rialto and the Pont de Neuilly, and were subsequently rendered more generic; the final designs still bear very close similarities to their specific prototypes; thus they are not truly generic.Some of the highest denominations such as the €500 are not issued in all countries, though they remain legal tender throughout the eurozone. Payments clearing, electronic funds transfer Capital within the EU may be transferred in any amount from one country to another.

All intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs.This includes all Member States of the EU, even those outside the eurozone providing the transactions are carried out in euro.Credit/debit card charging and ATM withdrawals within the eurozone are also charged as domestic, however paper-based payment orders, like cheques, have not been standardised so these are still domestic-based. The ECB has also set up a clearing system, TARGET, for large euro transactions. Currency sign A special euro currency sign (€) was designed after a public survey had narrowed the original ten proposals down to two. The European Commission then chose the design created by the Belgian Alain Billiet. The official story of the design history of the euro sign is disputed by Arthur Eisenmenger, a former chief graphic designer for the EEC, who claims to have created it as a generic symbol of Europe. ~ Inspiration for the € symbol itself came from the Greek epsilon (€)- a reference to the cradle of European civilisation - and the first letter of the word Europe, crossed by two parallel lines to certify the stability of the euro.

The European Commission also specified a euro logo with exact proportions and foreground/background color tones.While the Commission intended the logo to be a prescribed glyph shape, font designers made it clear that they intended to design their own variants instead.Typewriters lacking the euro sign can create it by typing a capital 'C', backspacing and over-striking it with the equal ('=') sign. Placement of the currency sign relative to the numeric amount varies from nation to nation, but for texts in English the symbol (and the ISO-standard "EUR") should precede the amount. Introduction of the euro The euro was established by the provisions in the 1992 Maastricht Treaty. In order to participate in the currency, Member States are meant to meet strict criteria such as a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average. In the Maastricht Treaty, the United Kingdom and Denmark were granted exemptions per their request from moving to the stage of monetary union which would result in the introduction of the euro.

Economists who helped create or contributed to the euro include Fred Arditti, Neil Dowling, Wim Duisenberg, Robert Mundell, Tommaso Padoa-Schioppa and Robert Tollison.[citation needed] (For macro-economic theory, see below.) The name euro was devised on 4 August 1995 by Germain Pirlot, a Belgian Esperantist and ex-teacher of French and history,and officially adopted in Madrid on 16 December 1995. Due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro. The definitive values in euro of these subdivisions (which represent the exchange rates at which the currency entered the euro) are shown at right. The rates were determined by the Council of the European Union,based on a recommendation from the European Commission based on the market rates on 31 December 1998. They were set so that one European Currency Unit (ECU) would equal one euro. The European Currency Unit was an accounting unit used by the EU, based on the currencies of the Member States; it was not a currency in its own right.

They could not be set earlier, because the ECU depended on the closing exchange rate of the non-euro currencies (principally the pound sterling) that day. The procedure used to fix the irrevocable conversion rate between the drachma and the euro was different, since the euro by then was already two years old. While the conversion rates for the initial eleven currencies were determined only hours before the euro was introduced, the conversion rate for the Greek drachma was fixed several months beforehand. The currency was introduced in non-physical form (traveller's cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the national currencies of participating countries (the eurozone) ceased to exist independently. Their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro. The euro thus became the successor to the European Currency Unit (ECU). The notes and coins for the old currencies, however, continued to be used as legal tender until new euro notes and coins were introduced on 1 January 2002.

The changeover period during which the former currencies' notes and coins were exchanged for those of the euro lasted about two months, until 28 February 2002. The official date on which the national currencies ceased to be legal tender varied from Member State to Member State. The earliest date was in Germany where the mark officially ceased to be legal tender on 31 December 2001, though the exchange period lasted for two months more. Even after the old currencies ceased to be legal tender, they continued to be accepted by national central banks for periods ranging from several years to forever (the latter in Austria, Germany, Ireland and Spain). The earliest coins to become non-convertible were the Portuguese escudos, which ceased to have monetary value after 31 December 2002, although banknotes remain exchangeable until 2022. DIRECT AND INDIRECT USAGE Direct usage The euro is the sole currency of 16 EU Member States: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. These countries comprise the "eurozone", some 326 million people in total.

Estonia will join in 2011. With all but two of the remaining EU members obliged to join, together with future members of the EU, the enlargement of the eurozone is set to continue further. Outside the EU, the euro is also the sole currency of Montenegro and Kosovo and several European micro states (Andorra, Monaco, San Marino and Vatican City) as well as in three overseas territories of EU states that are not themselves part of the EU (Mayotte, Saint Pierre and Miquelon and Akrotiri and Dhekelia). Together this direct usage of the euro outside the EU affects over 3 million people. It is also gaining increasing international usage as a trading currency, in Cuba,North Korea and Syria.There are also various currencies pegged to the euro (see below). In 2009 Zimbabwe abandoned its local currency and used major currencies instead, including the euro and the United States dollar. Use as reserve currency Since its introduction, the euro has been the second most widely held international reserve currency after the U.S. dollar.

The share of the euro as a reserve currency has increased from 17.9% in 1999 to 26.5% in 2008, at the expense of the U.S. dollar (its share fell from 70.9% to 64.0% in the same time frame) and the Yen (it fell from 6.4% to 3.3%). The euro inherited and built on the status of the second most important reserve currency from the German mark. The euro remains underweight as a reserve currency in advanced economies while overweight in emerging and developing economies: according to the IMF the total of euros held as a reserve in the world at the end of 2008 was equal to USD 1.1 trillion, with a share of 22% of all currency reserves in advanced economies, but a total of 31% of all currency reserves in emerging and developing economies.

The possibility of the euro becoming the first international reserve currency is now widely debated among economists.Former Federal Reserve Chairman Alan Greenspan gave his opinion in September 2007 that it is "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency."In contrast to Greenspan's 2007 assessment the euro's increase in the share of the worldwide currency reserve basket has slowed considerably since the year 2007 and since the beginning of the worldwide credit crunch related recession and sovereign debt crisis. Currencies pegged to the euro Outside the eurozone, a total of 23 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro including 14 countries in mainland Africa (CFA franc and Moroccan dirham), two African island countries (Comorian franc and Cape Verdean escudo), three French Pacific territories (CFP franc) and another Balkan country, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark). On 28 July 2009, Sao Tome and Principe signed an agreement with Portugal which will eventually tie its currency to the euro.

With the exception of Bosnia (which pegged its currency against the German mark) and Cape Verde (formerly pegged to the Portuguese escudo) all of these non-EU countries had a currency peg to the French Franc before pegging their currencies to the euro. Pegging a country's currency to a major currency is regarded as a safety measure, especially for currencies of areas with weak economies, as the euro is seen as a stable currency, prevents runaway inflation and encourages foreign investment due to its stability. Within the EU several currencies have a peg to the euro, in most instances as a precondition to joining the eurozone. The Bulgarian Lev and the Estonian kroon were formerly pegged to the German mark, other EU member states have a direct peg due to ERM II: the Danish krone, the Lithuanian litas and the Latvian lats. In total, over 150 million people in Africa use a currency pegged to the euro, 25 million people outside the eurozone in Europe and another 500,000 people on Pacific islands.

ECONOMICS Optimal currency area In economics, an optimum currency area (or region) (OCA, or OCR) is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. There are two models, both proposed by Robert A. Mundell: the stationary expectations model and the international risk sharing model. Mundell himself advocates the international risk sharing model and thus concludes in favor of the euro.However, even before the creation of the single currency, there were concerns over diverging economies. Yet the chances of a state leaving the euro, or the chances that the whole zone would collapse, are extremely slim. Transaction costs and risks The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks in the eurozone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (e.g., credit cards, debit cards and cash machine withdrawals). The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones.

Companies that hedge against this risk will no longer need to shoulder this additional cost. This is particularly important for countries whose currencies had traditionally fluctuated a great deal, particularly the Mediterranean nations. Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the eurozone. Price parity Another effect of the common European currency is that differences in prices - in particular in price levels - should decrease because of the 'law of one price'. Differences in prices can trigger arbitrage, i.e. speculative trade in a commodity across borders purely to exploit the price differential. Therefore, prices on commonly traded goods are likely to converge, causing inflation in some regions and deflation in others during the transition. Some evidence of this has been observed in specific markets. Macroeconomic stability Low levels of inflation are the hallmark of stable and modern economies. Because a high level of inflation acts as a tax (seigniorage) and theoretically discourages investment, it is generally viewed as undesirable. In spite of the downside, many countries have been unable or unwilling to deal with serious inflationary pressures.

Some countries have successfully contained them by establishing largely independent central banks. One such bank was the Bundesbank in Germany; as the European Central Bank is modeled on the Bundesbank,it is independent of the pressures of national governments and has a mandate to keep inflationary pressures low.Member countries that join the bank commit to lower inflation, hoping to enjoy the macroeconomic stability associated with low levels of expected inflation.The ECB (unlike the Federal Reserve in the United States of America) does not have a second objective to sustain growth and employment. Many national and corporate bonds denominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in legacy currencies.While increased liquidity may lower the nominal interest rate on the bond, denominating the bond in a currency with low levels of inflation arguably plays a much larger role. A credible commitment to low levels of inflation and a stable debt reduces the risk that the value of the debt will be eroded by higher levels of inflation or default in the future, allowing debt to be issued at a lower nominal interest rate.

Evidence on the effect of the introduction of the euro In conformity with the economic predictions, empirical studies have found that the introduction of the euro has had a positive impact on the movement of goods, financial assets, and people within the eurozone. In addition, countries which previously had weak currencies have benefited from lower interest rates and their firms now have easier access to capital. Trade The consensus from the studies of the effect of the introduction of the euro is that it has increased trade within the eurozone by 5% to 10%.On the lower bound, one study suggested an increase of 3%.A recent study estimates this effect to be between 9 and 14%. Investment Studies have found a positive effect of the introduction of the euro on investment. Physical investment seems to have increased by 5% in the eurozone due to the introduction.Regarding foreign direct investment, a study found that the intra-eurozone FDI stocks have increased by about 20% during the first four years of the EMU.Concerning the effect on corporate investment, there is evidence that the introduction of the euro has resulted in an increase in investment rates and that it has made it easier for firms to access financing in Europe.

The euro has most specifically stimulated investment in companies that come from countries that previously had weak currencies. A study found that the introduction of the euro accounts for 22% of the investment rate after 1998 in countries that previously had a weak currency.The effect is however less clear for firms coming from the strong currency countries; the introduction has not been beneficial for most of them. Inflation The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices. Paradoxically, this impression has not been supported by general indices of inflation, showing no major effect of the introduction of the euro. A study of this paradox has found that it is due to an asymmetric effect of the introduction of the euro on prices: while it had no effect on most goods, it had an effect on cheap goods which have seen their price round up after the introduction of the euro.

The study found that consumers based their beliefs on inflation of those cheap goods which are frequently purchased.It has also been suggested that the jump in small prices may be due to the fact that prior to the introduction, retailers made fewer upward adjustments and waited for the introduction of the euro to do so. Exchange rate risk One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates. It has been found that the introduction of the euro created "significant reductions in market risk exposures for non-financial firms both in and outside of Europe".These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-Euro firms with a high fraction of foreign sales or assets in Europe". These changes were however "statistically and economically small". Financial integration The introduction of the euro seems to have had a strong effect on European financial integration.

According to a study on this question, it has "significantly reshaped the European financial system, especially with respect to the securities markets.However, the real and policy barriers to integration in the retail and corporate banking sectors remain significant, even if the wholesale end of banking has been largely integrated."Specifically, the euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the eurozone.On a global level, there is evidence that the introduction of the euro has led to an integration in terms of investment in bond portfolios, with eurozone countries lending and borrowing more between each other than with other countries. Effect on interest rates The introduction of the euro has decreased the interest rates of most members countries, in particular those with a weak currency. As a consequence the market value of firms from countries which previously had a weak currency has very significantly increased.The countries whose interest rates fell most as a result of the euro are Greece, Ireland, Portugal, Spain, and Italy. Price convergence The evidence on the convergence of prices in the eurozone with the introduction of the euro is mixed.

Several studies failed to find any evidence of convergence following the introduction of the euro after a phase of convergence in the early 1990s.Other studies have found evidence of price convergence,in particular for cars.A possible reason for the divergence between the different studies is that the processes of convergence may not have been linear, slowing down substantially between 2000 and 2003, and resurfacing after 2003 as suggested by a recent study (2009). Tourism A study has found that the introduction of the euro has had a positive effect on tourism flows within the EMU, with an increase of 6.5%. EXCHANGE RATES Flexible exchange rates The ECB targets interest rates rather than exchange rates and in general does not intervene on the foreign exchange rate markets, because of the implications of the Mundell-Fleming Model which suggest that a central bank cannot maintain interest rate and exchange rate targets simultaneously because increasing the money supply results in a depreciation of the currency. In the years following the Single European Act, the EU has liberalized its capital markets, and as the ECB has chosen monetary autonomy, the exchange rate regime of the euro is flexible, or floating.

Against other major currencies After the introduction of the euro, its exchange rate against other currencies fell heavily, especially against the U.S. dollar. From an introduction at US$1.18/€, the euro fell to a low of $0.8228/€ by 26 October 2000. After the appearance of the coins and notes on 1 January 2002 and the replacement of all national currencies, the euro began steadily appreciating, and regained parity with the U.S. dollar, on 15 July 2002. The euro has not fallen below parity with the U.S. dollar since December 2002 but has risen in value. On 23 May 2003, the euro surpassed its initial ($1.18) trading value for the first time. At the end of 2004, it reached $1.3668 (€0.7316/$) as the U.S. dollar fell against all major currencies. Against the U.S.

dollar, the euro temporarily weakened in 2005, falling to $1.18 (€0.85/$) in July 2005, and was stable throughout the third quarter of 2005. In November 2005 the euro again began to rise steadily against the U.S. dollar, hitting one record high after another. On 15 July 2008, the euro rose to an all-time high of $1.5990 (€0.6254/$). In a reversal, in August 2008 the euro began to drop against the U.S. dollar.

In just two weeks the euro fell from its peak to $1.48 and by late October it reached a two and a half year low below $1.25 before moving back above $1.50 by November 2009.On 29 December 2008, the pound sterling fell to an all-time low of £0.97855 (€1.0219/£) against the euro, although its value recovered somewhat in 2009.In early 2010, concerns over the solvency of Greece caused a drop in the exchange rate against the dollar. If Greece is ejected from the euro zone, it faces a chaotic currency switch - The Washington Post If Greece is ejected from the euro zone, it faces a chaotic currency switch The inside track on Washington politics. Be the first to know about new stories from PowerPost. Sign up to follow, and we’ll e-mail you free updates as they’re published. You’ll receive free e-mail news updates each time a new story is published. You’re all set!

Greeks flood ATMs after banks close as crisis deepens View Photos Shuttered banks and a closed stock market are causing many to panic and purchase more gas and goods. Greece likely will find out this week whether it will be able to hold on to the euro. Caption The Greek Parliament backed down in its confrontation with the country’s creditors. July 13, 2015 People stand in line to use a bank ATM as a person begs for alms in Athens. Thanassis Stavrakis/AP Buy Photo Wait 1 second to continue. By Michael Birnbaum and Anthony Faiola By Michael Birnbaum and Anthony Faiola July 2, 2015 Follow @michaelbirnbaum Follow @Anthony_Faiola ATHENS — The choice can be attractive for nations in financial peril: Stop paying debts, fire up the printing presses and flood the zone with cash. But the euro, for Greece, foreclosed that option. Now, longtime advocates of an exit from the shared currency may soon prevail. If Greeks vote this Sunday against the harsh austerity that Europe has demanded in exchange for a financial lifeline, European Union leaders have said that Greece will eject itself from the euro zone.

The transition would be a financial experiment run on the fly — and even some who have long championed Greece’s old currency say they are worried about the chaos that could ensue. Greece’s leaders have vowed to their citizens that they can reject austerity without rejecting the euro, but European leaders have said they will not blink. That has Greeks like Michael Karalis wincing as they stare at their life savings locked away inside banks , fearing that their euros could soon be converted into a less-valuable replacement. “I know that I will lose my savings from a hardworking life,” said Karalis, 71, a retired engineer, as he waited to pull money from an ATM on Thursday. Long lines for cash have become ubiquitous in Greece after strict limits were imposed over the weekend on how much citizens could withdraw from their accounts. Now people are limited to 60 euros, or about $67, per day. “I’m fine. But the savings was for my children and grandchildren,” Karalis said. Greece missed its $1.7 billion debt repayment to the International Monetary Fund, becoming the first developed country to default. Here's a look at some of the fallout.

(Jorge Ribas/The Washington Post) A large majority of Greeks want to remain in the euro zone, and many do not see a “no” vote in the referendum as a rejection of the currency. But without serious talks toward a new bailout plan, the European Central Bank may feel that its rules oblige it to pull the plug on emergency assistance for Greek banks. If that were to happen, the only way for Greece to maintain a functioning financial system would be a quick government decision to print an alternative currency. The mechanics of a currency switch would be chaotic, if technically simple, with a return to the drachma or a new national coin of any other name potentially taking the early shape of government- or bank-issued IOUs. Greece, which now prints euros, as do the other nations that share the currency, could within weeks alter its ­presses to churn out national bills — or outsource the task to specialized companies abroad. Some economists have argued for years that Greece should leave the euro. There would be short-term pain, they say, as Greeks adjust to the switch to a local currency that would probably be worth far less than the euro.

But in the long term, advocates say, Greece would regain control of its monetary policy, finding itself once again able to boost stimulus spending even as a weaker currency makes its exports far more attractive on world markets. And more expensive imports would give an edge to domestic industries in the local market. “Greece belongs to a deeply diseased monetary union,” said Kostas Lapavitsis, an economist and member of Parliament from the ruling Syriza party who has long called for a return to the old currency, the drachma. “If Greece went back to a national currency, it wouldn’t be returning to some kind of paradise,” Lapavitsis said. “What we need is an economy that can deal with these extraordinary pressures and difficulties in an organized manner.” He said he feared that if Europe pushed Greece off the euro by force, the results could be far more painful than if there was an organized, negotiated exit of the type he has long advocated. In light of Greece’s financial troubles, restaurants and shops are noticing a drop in the number of tourists visiting Athens. (Reuters) But critics argue that those who see a long-term benefit from a euro exit are fantasists who pay little attention to Greece’s recent history.

A successful transition would require a government with a deft financial touch and a will to control spending. Otherwise, Greece could find itself again trapped in the cycle of high inflation it lived in before it adopted the euro. Runaway inflation could erode the value of salaries and nest eggs. “If you have a smart and tough government, you could try to use a euro exit to get the country back on track,” said Peter Bofinger, an economic adviser to German Chancellor Angela Merkel. But if a government started increasing pensions and hiring more public-sector workers — a temptation in a nation where unemployment has skyrocketed and poverty is spreading — “the risk is a spending spree that would lead to hyperinflation,” he said. Some analysts have pointed to Argentina’s devastating debt default and devaluation in 2001, and its subsequent recovery, as evidence that even a less-than- reform-minded government can leverage its monetary policy to return to growth. But Argentina differs from Greece in deep ways. Argentina is one of the world’s top 25 economies, a commodity-rich nation that exported its way to growth with soybeans, corn and heavy industries such as steel and cars. Greece, with an economy the size of Connecticut’s, lacks many of those advantages.

Instead, Greece risks replicating post-2001 Argentina’s downsides with none of the upsides. Today, despite Argentina’s growth, its government is still known for fudging economic data. Nearly 15 years later, it is locked in complex legal battles tied to its defaulted debt. Winemaker Stellios Boutaris should be perfectly positioned to benefit from a Greek exit from the euro, by the lights of international economists, since exports are the great hope for Greece’s future financial success. His high-end wines, gathered from vineyards that stretch across his country’s verdant hills, would be more competitive abroad if his costs at home were in weak drachmas. But instead of relishing an exit from the euro zone, Boutaris is worrying about his bottom line. Like many Greek exporters, he relies heavily on a supply chain of imported goods. Those costs could skyrocket while credit dries up. Advocates of leaving the euro who say exporters like him would fare better on the drachma “don’t understand that we have to import bottles,” Boutaris said Thursday at an Athens wine bar, where the euro was the beginning, middle and end of all conversations. “We have to import corks.

We have to import barrels.” Only the grapes themselves — and the workers — are local, since Greece doesn’t produce any of the other supplies. All of those imports would become steeply more expensive if Greece went off the euro and began printing its own money. With the days counting down to Sunday’s referendum, opinion polls show the vote too close to call. But amid fears about what will happen Sunday, many Greeks are trying to take euros from their accounts while it’s still possible. “I don’t know what will happen, so I am trying to get as much cash as I can,” said Karalis, the retired engineer, as his turn finally came to use the ATM. “At the age I am, it’s very depressing to have to wait here in this line.” Faiola reported from Berlin. Stephanie Kirchner, also in Berlin, contributed to this report.

Question: What was the currency of Greece before it adopted the Euro?
Answer: Drachma